Seasonality and the heavy oil discount
Seasonally, crude oil prices tend to peak in the summer. Refineries often maximize production rates to take advantage of high gasoline prices during the summer driving season. This drives up the demand for crude oil, including heavy Canadian crude. This year was no exception, as crude oil prices peaked in late June. Historically, the heavy oil discount (or the price difference between West Texas Intermediate and Western Canada Select) also tends to narrow in summer months. The price difference has been as low as $10/barrel in the summers of 2011 and 2012.
However, crude oil demand tends to slow down going into the fall as the Gulf Coast refineries get ready for maintenance turnaround season, which typically occurs between September and November. Heavier crude oil streams, such as Western Canada Select, get hit particularly hard. Their discount to WTI therefore tends to widen in the winter.
In the past 4 years, the heavy oil discount was found to peak in mid to late winter - more specifically, February 2011, March 2012, February 2013 and December 2013. Price differentials as high as 40$ have been observed in the past few years, which is particularly undesirable for Canadian oil producers.
The 2014 winter heavy oil discount will hopefully not be as wide as observed in the past few years. Many of the Gulf Coast refineries have recently been retrofitted to take advantage of the heavier (and less expensive) crude oil streams sourced from Canada. This has helped boost demand for WCS and may limit the discount to WTI. However, traders should expect price differentials to rise as we head into fall and continued weakness in Western Canada Select going into the winter months.